How a supply support arrangement is priced

← All Insights

1. Two cases, one arrangement

Section 8 of Chapter 7 of Volume 15 of the Financial Management Regulation sets how a Cooperative Logistics Supply Support Arrangement (CLSSA) is priced and financed. The arrangement runs on Foreign Military Sales Orders (FMSOs) covering stock, consumption and storage (FMR Vol. 15, Ch. 7, para. 8.1.1). Two cases are required, an FMSO I and an FMSO II, and both must be executed so that the buyer’s requirements are anticipated and met on an equal footing with American requirements.

The FMSO I has two parts (FMR Vol. 15, Ch. 7, para. 8.1.2.1). Part A is the on-hand portion of the inventory, normally 5 months. Part B is an on-order dependable undertaking, normally covering 12 months. Those levels can be adjusted for equipment where they are unrealistic, which may require renegotiating the arrangement, and the office that built it keeps the supporting documentation. The FMSO II represents the purchaser’s expected yearly consumption (FMR Vol. 15, Ch. 7, para. 8.1.3). How the arrangement works from the partner’s side is covered in cooperative logistics supply support arrangements.

2. Sizing the on-hand share

The on-hand share of the equity list depends on when the case was accepted (FMR Vol. 15, Ch. 7, para. 8.1.2.2). For FMSO I cases accepted on or after September 20, 2005, the on-hand portion is 30 percent of the total investment or equity list. For cases accepted before that date it stays at 5/17 of the list.

The arrangement is written as a dollar amount rather than an item list (FMR Vol. 15, Ch. 7, para. 8.8). A listing of the specific items needed to support the weapon system is not developed. Under this dollar value concept, the purchaser’s equity stays valued at the cash deposited for the FMSO I.

3. How the cash cycles

Cash paid when the FMSO I is accepted should equal the Part A on-hand portion plus the administrative surcharge (FMR Vol. 15, Ch. 7, para. 8.1.4.1). The on-order portion is paid for differently. Cash paid under the FMSO II liquidates obligations to suppliers, and in turn creates a new order and restores obligational authority to the FMSO I. If the progress payments an implementing agency needs differ from the Part A value by more than 10 percent, the component must either amend the case or request additional progress payments to match (FMR Vol. 15, Ch. 7, para. 8.1.4.2).

Cash for requisitions is paid in advance of each quarter covered by the case (FMR Vol. 15, Ch. 7, para. 8.1.4.3). The cycle runs from Part A cash financing on-hand stock, through requisitions filled from that stock and replenished under contracts awarded on Part B authority. Contractors are paid from FMSO II funds, and paying them restores the Part B authority so the cycle starts again (FMR Vol. 15, Ch. 7, para. 8.1.4.3.4 to FMR Vol. 15, Ch. 7, para. 8.1.4.3.6).

The entire FMSO I case represents obligational authority (FMR Vol. 15, Ch. 7, para. 8.1.5.1). Normally no cash is billed against Part B unless the arrangement is partly or wholly terminated. The FMSO II provides authority only as orders are received. If both work properly, the result is a constant 12 months of authority in the financing account, never more or less, once the Part A stock has been bought. The cash and authority go to the command or supply agency expected to support the country, which uses them to raise stock and on-order quantities ahead of that country’s requisitions (FMR Vol. 15, Ch. 7, para. 8.1.5.2).

4. Surcharges and storage

A one-time, nonrefundable administrative surcharge of 5 percent is charged on Part A (FMR Vol. 15, Ch. 7, para. 8.3.1). An amendment that lowers Part A brings no adjustment to that surcharge. An amendment that raises it is charged 5 percent on the full increase. The regulation’s example runs a basic case of $3,000,000 through five amendments, reaching accrued surcharges of $350,000.

Part B carries no administrative surcharge (FMR Vol. 15, Ch. 7, para. 8.3.2). Instead, the current surcharge, stated there as 3.2 percent, is charged on requisitions under the FMSO II. If an FMSO I is terminated, the current surcharge is charged on inventory above the on-hand portion. No extra surcharge falls on the on-hand portion itself, since it was paid in advance.

Storage depends on the kind of item (FMR Vol. 15, Ch. 7, para. 8.4). There is no annual inventory maintenance and storage charge for Defense Working Capital Fund items, because the fund’s standard price recovers all costs. For other items an annual storage fee of 1.5 percent is charged on the value of the stored Part A assets. The standard prices of working capital fund items already carry a surcharge for normal operating losses in storage (FMR Vol. 15, Ch. 7, para. 8.5).

5. Losses and obsolete stock

Unusual losses are shared in proportion. Stock losses from enemy action, major disaster or other natural casualty are assessed against the foreign government in proportion to its stock case’s share of the total value in storage (FMR Vol. 15, Ch. 7, para. 8.6).

Obsolete material is handled according to whose requirement has lapsed. If an item becomes obsolete or excess to the United States but not to the buyer, the United States may ask the buyer to withdraw its undelivered quantity (FMR Vol. 15, Ch. 7, para. 8.7.1). Further quantities may be offered at fair value prices. If the item becomes excess to the buyer only, the buyer may ask to cancel and apply its equity to other items (FMR Vol. 15, Ch. 7, para. 8.7.2). If cancellation is not agreed, the United States disposes of the material and credits the net proceeds to the buyer. If the item is excess to both, the United States disposes of it and credits the buyer with its proportional share of the net proceeds (FMR Vol. 15, Ch. 7, para. 8.7.3).

Termination brings a review of the country’s demand data for specific items (FMR Vol. 15, Ch. 7, para. 8.8). Where that demand led to buying stock above approved retention levels, the country is told that its stocks must be drawn down, or that the parties must reach an agreeable settlement.

Key terms

FMSO I	The stock case: Part A on-hand inventory and Part B on-order dependable undertaking.
FMSO II	The consumption case, covering the purchaser’s expected yearly requisitions.
Equity	The purchaser’s stake, valued at the cash deposited for the FMSO I.
Storage fee	An annual 1.5 percent charge on stored Part A assets that are not working capital fund items.
Unusual inventory loss	A loss from enemy action, major disaster or natural casualty, shared in proportion to stock value.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

How Sentfore supports this

Spares moved under these arrangements still have to reach the units that use them. Sentfore works at the delivery end of defense programs in difficult environments, providing secure movement, protective security, facilities and life support. Requirements can be sent through the contact page.